Warble Enterprises Ltd v. Harry George King and Another
Read the full judgment text of HCA 2079/1970 on BabelCite. This High Court CFI judgment.
1. The only evidence in this case consists of an agreed bundle of documents, and the case turns upon the interpretation to be accorded to a particular debenture.
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HCA002079/1970 IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION ACTION NO. 2079 OF 1970 -----------------
----------------- Coram: Pickering, J. Date of Judgment: 16th May 1974. ----------------- JUDGMENT ----------------- 1. The only evidence in this case consists of an agreed bundle of documents, and the case turns upon the interpretation to be accorded to a particular debenture. 2. The Plaintiff Ltd. Co., which operated quarries, is in creditors voluntary liquidation pursuant to a resolution passed by creditors on 2nd December, 1966. 3. It is said in the Statement of Claim that the Defendants carry on business in Hong Kong as accountants and auditors, but according to the Statement of Defence it is only the first Defendant who pursues that occupation whilst the second Defendant is a former employee of the first. 4. However that may be, before the Plaintiff Co. went into liquidation, the two Defendants were appointed receivers of the Company and so acted between 11th October, 1966 and 22nd November of that year. The present claim against them arises out of a payment which they made, during that period, from the Company's assets. 5. To trace the history of the claim, it is necessary to go back to 1965, in which year the Plaintiff Co. issued a debenture to a firm called Pioneer Concrete Services Ltd. (which I shall refer to as "Pioneer") and which company, incidentally, held 51 per cent of the shares of the Plaintiff Co. The debenture was to secure an interest-free loan of $255,000 from Pioneer to the Plaintiff Co., and it created a floating charge over the whole undertaking and assets of the Plaintiff Co. as well as a specific charge on plant and machinery detailed in a schedule to the debenture. 6. Although the debenture was to secure some $255,000 only, Pioneer had in fact advanced to the Plaintiff Co. half a million dollars. The balance of $245,000 was secured by two personal guarantees, each in the sum of $122,500, given respectively by a Mr. Fok Po Shang and a Mr. Lee Sai Wah. 7. In order that the nature of the dispute between the parties may be readily intelligible, it is desirable to set out the terms of the debenture:
8. There follows the schedule of plant and machinery specifically charged and thereafter appear the conditions referred to in Clause 6 of the debenture which, by that clause, are deemed to be part of the debenture. The only condition which it is necessary to set out is Condition 2 which reads as follows:-
9. Execution was levied on 5th October, 1966 against the Plaintiff Co. and the Defendants were appointed receivers on 11th October of that year. 10. In the course of their receivership, the Defendants repaid to Pioneer the sum of $255,000 secured by the debenture. It is the complaint of the Plaintiff Co. that such repayment was wrongful in that there were insufficient profits to enable it to be made. The Plaintiffs rely upon Clause 3(a) of the debenture with its reference to the principal moneys secured thereby being payable "exclusively out of the profits of the company"; and to the fact that the floating and specific charges created by Clauses 4 and 5 respectively are expressed to be charged "with such payments", that is, with payments to be made exclusively out of the profits of the Plaintiff Co. 11. Those profits were certified by the Company's auditors to have amounted, between 6th August 1965 (the date of the debenture) and 11th October, 1966 (the date of the appointment of the receivers) to $405,774. It is the Plaintiffs case that the total loan of half a million dollars was repayable out of profits and that the two sums of $122,500 each, the subject of personal guarantees by Mr. Fok and Mr. Lee, were due to be repaid first under the terms of the debenture. That has not been done but had it been done as the Plaintiffs say it should, then after repayment of those two sums totalling $245,000 there would have remained available for the repayment of the balance of $255,000 only $160,744. The Defendants have, however, paid $255,000 and have therefore, the Plaintiffs allege, over-paid $94,226 which is the amount of their claim. 12. Mr. Mills-Owens, for the Plaintiff Co., contended that the security given to the debenture-holder was only security to the extent of the actual profits made and the balance of the loan was unsecured. Counsel quoted the case of Lemon v. Austin Friar Investment Trust(1) in which Sargant, L.J. referred to the debt in that case as being not only payable in the future but payable on a contingency. The Defendants, counsel said, had confused two questions: first, had the $255,000 become repayable? And secondly, were there profits from which to repay it? 13. Mr. Gittins for the Defendants argued that the unequivocal covenant for repayment contained in Clause 1 was independent of the availability of profits, as was the provision in Condition 2 that the principal moneys should immediately become payable upon (inter alia) execution being levied against the Company. 14. In the case of Lemon v. Austin Friars Investment Trust, Mr. Gittins pointed out, the debenture contained conditions as in the present case, but not all the conditions were set out in the report of the Lemon case and it was impossible to say whether or not a condition similar to our Condition 2 operated in that case. In the present case, payments out of profits related only to non-default payments prior to 31st December, 1966. A clause giving immediate rights to debenture-holders in certain circumstances was a commonplace as exemplified by the case of Taunton v. The Sheriff of Warwickshire(2). The case of Wallace v. Universal Automatic Machines Co.(3) was authority for saying that upon a default expressed in the debenture taking place, the date expressed as the date for repayment (in our case, 31st December, 1966) was anticipated and this is what had happened. If repayment was to be made only out of profits, counsel continued, it was meaningless and superfluous to have a charge upon the assets. 15. In reply, Mr. Mills-Owens urged that the document must be construed as a whole, and Clause 1 could not be looked at in isolation, having been modified by Clause 3. I entirely agree that the document must be construed as a whole but that also means that the Plaintiffsmust not look at Clause 3 in isolation. The construction for which Mr. Mills-Owens strives would lead to a complete incompatibility between Clause 3 and Condition 2. The one provides for repayment exclusively out of profits, the other for "immediate" repayment in certain eventualities; on the happening of one of those eventualities, and in the absence of profits, "immediate repayment", on the Plaintiffs' construction, would be impossible. Yet some meaning has to be aseribed to the wording of Condition 2 and as I see it, the meaning to be so ascribed is the plain and ordinary meaning of the words, that is, that the whole of the debt becomes repayable upon execution being levied against the Plaintiff Co. 16. In Lemon v. Austin Friars Investment Trust(1) Sargant, L.J. referred to the debt as being payable in the future and upon a contingency. In our case, the debt is payable in the future and upon the happening of any one of several contingenices, of which the making of sufficient profit was only one. 17. This construction also appears to me to coincide with commercial sense for it would be a very foolish lender - majority shareholder or not - who would contract for payment out of profits and leave himself with no recourse if there were no profits and the borrower was in financial straits. 18. Mr. Mills-Owens has posed two questions. First, has the loan become repayable? And the answer to that is yes. And secondly, are there profits from which to repay? That second question, it seems to me, is irrelevant in the events which have happened. 19. The Plaintiffs' claim must be dismissed. I am told that the Plaintiff Co. is insolvent to the extent of approximately $3,000,000, but, for what it is worth, costs will follow the event. Representation: R.H. Mills-Owens (Peter Mo & Co.) for Plaintiffs S.V. Gittins, Q.C. and K. Bokhary (Johnson, Stakes & Moster) for Defendants. (1) 1926 Ch. 1 (2) 1895 2 Ch. 319 (3) 1894 2 Ch. 547. |